Here's how to choose the best financial gifts for your loved ones

He’s a doting grandfather who showers his three-year old grandson with gifts. But this year, instead of toys and sweets, Delhi-based retiree Rajiv Mathur (see picture) wants to start a mutual fund SIP in the child’s name. “My grandson will need a large sum of money for his higher education. If I start an SIP in an equity fund today and it is continued for the next 15-odd years, I am sure the need will be covered when the time comes,” he says.

If you want to gift something special to a loved one, securing his financial future is the best way to show how much you care. Instead of buying a gold chain for your daughter or putting cash into your son’s bank account, gift them something that can help fulfil their life dreams. An exotic honeymoon package or a designer handbag are great as wedding gifts, but a medical policy or life insurance cover for the couple might be of greater value.

Financial gifts have the potential to transform the lives of the recipients, say financial planners. Mathur’s grandson might not find the SIP very appealing today, but age is on his side, and the investment can compound multi-fold and fulfil his future need for money. “Gifting a financial instrument can be a life-changing experience, particularly for those who are averse to investing in risky products,” reckons Rohit Shah, CEO, Getting You Rich.

In Pic: Rajiv Mathur 62, DelhiInstead of gifting cash or starting fixed deposits, he wants to start mutual fund SIPs in the name of his three year-old grandson. He believes the investment will grow to a sizeable amount by the time the child is ready for college in 15 years.
“If I start an SIP in an equity fund today and it is continued for the next 15-odd years, his higher education expenses would get covered.”

Choose the right optionNot all financial instruments make for great gifts. Opening a fixed deposit or recurring deposit in the name of minor child is a popular route, but clubbing provisions mean that income from such investments will be added to income of the donor. If he is in the highest tax slab, the donor will incur a huge tax liability. Likewise, a traditional insurance policy that requires premium payments every year and offers 4-5% returns can become a millstone around the neck of the policyholder.

PPF and Sukanya Samriddhi Yojana offer tax free returns and also tax deduction under Sec 80C, but there are restrictions on who can open (only parents or legal guardian) and how much one can invest. In a PPF account, the combined sum invested in the parent’s and child’s accounts cannot exceed Rs 1.5 lakh a year. The Sukanya scheme also has a Rs 1.5 lakh annual limit. Child plans from insurance companies also find many takers. These policies pay a lump sum on the death of the parent, and continue investing on his behalf. But this waiver of premium benefit comes at a huge cost—higher mortality charges levied by child plans makes them expensive compared to ordinary Ulips.

The investment should create value for the recipient; the gift loses its worth if its value is eroded by inflation and taxes. “Gold, fixed deposits or property have various shortcomings in terms of returns, liquidity and tax efficiency. When creating a long-term savings pool for your loved ones, it is better to take the equity route to make the money grow in real terms,” asserts Rupesh Bhansali, Head (distribution), GEPL Capital.

Historical data shows that equity is the only asset class that can comfortably beat inflation over the long term. Mutual funds are a very low-cost and convenient way of investing in stocks. They are also more rewarding than other common gifting options such as fixed deposits and gold. While diversified equity funds have delivered more than 15% annualized returns in the past five years, bank deposits have yielded less than 6% and gold prices have actually declined.

Gifting stocks and fundsYou can gift shares by transferring them directly to the recipient’s demat account. Fill up the delivery instruction slip mentioning the name and demat account number of the recipient and the scrips to be transferred. The execution date must be mentioned. The recipient in turn has to fill out a receipt instruction with relevant details and submit it to his depository participant.

The shares received from your depository participant will be credited to his demat account once the receipt instruction is received. Since shares are movable property, it is not mandatory to execute a gift deed. However, to create a legal record, it is best to execute a gift deed on an appropriate stamp paper. If the shares are in physical certificate form, a share transfer deed will have to be executed and sent to the registrar of the company.

The procedure for gifting mutual funds is a little different. Unlike shares, mutual fund units cannot be simply transferred from one person to another, except on demise of the unit-holder. Also, mutual funds don’t accept payments from third-parties. One cannot invest in a mutual fund using a cheque issued by another person.

However, third-party payments are accepted by mutual funds in case of payment on behalf of a minor. So, parents, grandparents and other immediate family members can invest via mutual funds in the name of minor children. But there are a few restrictions: The donor has to submit a declaration, specifying details of bank account from which payment will be made and the relationship with the minor. This will need to be signed by the legal guardian of the minor.

How to gift a mutual fundThe initial procedure is elaborate but easy to follow once it gets started1. Start mutual fund investment in the name of the child. Form has to be signed by parent or legal guardian, who will have to complete KYC formalities.2. KYC requires selfattested copies of PAN of guardian, birth certifi cate of minor, cancelled cheque of guardian bank account, and third-party declaration stating relationship with child.3. If starting SIPs, give ECS mandate for direct transfer from the bank account of the person gifting the SIP.4. These are onetime procedures required for the initial investment. Subsequent investments in the same folio of the same fund house do not require these documents.5. Till the child is a minor, the mutual fund account will be operated by the parent or legal guardian. After he turns 18, all SIPs will be suspended and the child will become operator of the folio.

While immediate family members or the legal guardian can invest any amount on behalf of the minor, other related persons cannot invest more than Rs 50,000 for every one-time purchase or SIP contribution. Also, KYC is mandatory for both the guardian and donors. So if you are gifting the mutual fund to your nephew, KYC will have to be done for both you and his parent.

The account is operated by the parent or the legal guardian until the child turns major. At the time of redemption or when the child becomes a major, fresh KYC documents of the beneficiary have to be submitted (PAN and bank account details), changing the account status from minor to major.

There is also a tax angle to consider. Shares and funds gifted by specified relatives do not have any tax implications for the recipient. However, if you get more than Rs 50,000 as gift from unrelated persons in a financial year, the amount is added to your income and taxed at the marginal rate. In case of minors, this gifted amount is added to the income of the parent who earns more. However, gifts received on certain occasions (wedding, mundan, naming ceremony, etc) are exempt from tax.

Benefits of long-term investingStarting an SIP in an equity fund and persisting with the regular commitment up to a certain age is the ideal savings gift for infants, say planners. The power of compounding can create a sizeable corpus for the child for his long-term goals. Assuming a 12% return, a monthly SIP of Rs 5,000 in an equity fund can grow to Rs 23.8 lakh in 15 years. If you invest the same in a PPF account, it will grow to around Rs 16.43 lakh in the same time. Apart from a SIP, parents may also make an initial contribution to an equity fund and subsequently direct any monetary gifts received by the minor child from grandparents or other relatives to the fund under their guardianship.

A caveat: one should not dip into these savings prematurely. Withdrawals or interrupting the investments will not allow the SIP to work its magic. The good news is that the sentimental value attached to such gifts prevents parents from dipping into these investments, allowing the accumulated corpus to grow unimpeded. Amol Joshi, Founder, PlanRupee Investment Services, says, “Starting a mutual fund account in your child’s name is a good antidote for emotions that often come in the way of goals. Given the end goal, parents are less likely to act on impulses and redeem midway, allowing the money a chance to grow.”

Some child-specific mutual funds such as Axis Children’s Gift Fund, HDFC Children’s Gift Fund, ICICI Prudential Child Care, SBI Magnum Children’s Benefit and LIC MF Children’s Gift Fund have a lock-in facility that prevents withdrawals before the child becomes a major. Exit loads are typically higher so early withdrawals come at a higher cost. These also invest a portion of the corpus in bonds and other fixed income instruments, similar to balanced funds. Finally, these schemes do not have any restriction on the amount that can be invested by related persons.

However, experts insist that one need not opt specifically for child-specific plans. Just because they are packaged as such, does not give them any particular edge over traditional equity funds. Suresh Sadagopan, Founder, Ladder 7 Financial Services, argues that regular equity funds are well equipped for purpose of gifting a child. “For a time-frame of 10-15 or more years, a regular equity fund will provide better wealth creation than these plans which are positioned like balanced funds,” he says.

It is currently not possible for someone to invest in mutual funds in the name of their parents, siblings, spouse or adult children. However, SBI Mutual Fund has launched Bandhan SWP (Systematic Withdrawal Plan), a unique facility that allows an investor to transfer a fixed amount on a monthly basis from his mutual fund to beneficiaries in his family. Investors have to fill up a form for Bandhan SWP, specifying beneficiary details, withdrawal amount, duration of SWP and date of SWP, among other details. After the beneficiary’s KYC is complete, money starts flowing into his bank account.

The best wedding giftsInsurance policies may not appear very appropriate as wedding gifts because they relate to a very unpleasant situation. But it can be a very useful gift for the bride. If the groom is around 30 years old, a term insurance cover of Rs 1 crore for 30 years will cost around Rs 8,000-10,000 per year. Tell them that you are paying the first year’s premium and they will have to renew the plan in the following years.

Term plans are often considered a waste of money because there is no maturity value. If the couple shares this view and might discontinue the policy after a few years, go for a single premium plan. The entire premium is paid at one go, so there is no chance of the policy lapsing. But single premium plans are very costly. If your budget is smaller, go for a lower cover and shorter tenure of 20 years. Keep in mind though that an insurance cover should not end when one is his 40s or 50s because that is the time he needs it most.

Insurance as wedding giftHow much will it cost

Life insuranceAge: 30 years Term: 30 yearsMedical insuranceSimilarly, a health insurance policy for the couple is a perfect wedding gift. If the couple plans to start a family in about 2-3 years, you can even give them a policy that covers maternity expenses. Such policies have a waiting period of 18-24 months before maternity expenses get covered. A health cover of Rs 5 lakh, which also includes maternity expenses, will come for around Rs 12,000 a year.